A New Online Bank Touts 4% On Deposits, With Some Strings Attached

We all know there's virtually no interest to be made by keeping money in the bank.

The average interest rate on a savings account is just 0.06%, according to the FDIC, even as the Federal Reserve slowly raises its benchmark interest rate. However, a new online bank is dangling a rate that beats anything else out there, at least for those users willing to work for it.

Beam, a San Francisco-based start-up that is backed by an FDIC-insured bank partner, is planning to launch a national savings account this fall that sports up to a 4% interest rate. That is 67 times higher than a traditional bank. It says it can do so by cutting down on overhead costs, like those incurred by running bank branches and big marketing campaigns.

"We're reducing costs and expenses that are unnecessary and passing those savings along to customers in the form of higher interest," says Yinan Du, founder and CEO of Beam. "Banks are not the most efficient of entities."

That same argument has been made plenty of times before by online banks like Ally and Bank of the Internet, which offer interest rates around 1% on savings accounts. Du insists there is more belt-tightening to be done.

The Beam account is meant to be supplementary to an everyday checking and savings account, yet savers interested in setting and forgetting their cash will find there is some legwork involved in nabbing the 4% rate. Beam promises all users a 2% interest rate on up to $50,000. To earn more than that, Du says, users will essentially be rewarded for logging into, and engaging with, the app. He declined to share too many details before launch.

However, it's clear that a primary way users can earn a higher interest rate is by telling others about Beam. Remember the company is trying to cut down on costs and is relying on its users for marketing. For instance, those who spread the word about Beam before the launch could earn a 7% interest rate for the first 100 days and the chance to move up the 20,000-person waitlist.

Du says it's possible to earn a higher rate by simply spending time on the app. "The product is designed so that if you have zero friends you can earn higher interest," he says. "It's not necessarily contingent on referrals. We're trying to be truly consumer-centric."

Deposits will be held by a FDIC-insured bank partner, which means balances up to $250,000 will be covered in the event that Beam or the bank goes out of business. Beam has declined to share publicly which bank it is partnering with before launch, other than to say it is a U.S.-based bank that has been in operation for decades. Users shouldn't deposit any money with Beam until they learn of the bank partner.

"It's curious to me that they'd start to publicize themselves before they can disclose this information because it's an obvious first question," says Greg McBride, chief financial analyst at Bankrate.

Beam, which earns a servicing fee to perform marketing, customer service and product development duties, will be under pressure to prove to its partner bank that this is a profitable endeavor. It says it's not going to peddle credit cards or other financial products, from the bank or other financial institutions, at this time. However, that could be coming. According to its privacy policy, users can expect marketing emails from affiliated third parties that take into account their creditworthiness and other personal information.

Many community banks and credit unions have also vied for consumers by eliminating nasty fees and dangling tantalizing rates in an effort to set themselves apart from the big, national banks.

For instance, the Wichita Falls, Texas-based Texoma Community Credit Union offers a 3.51% interest rate on a checking account through a partnership with a company called Kasasa. However, users who don't live in the region where the credit union is located will find they aren't eligible. There are often certain requirements, too, such as using your debit card a certain number of times a month, in order to earn the full interest rate.

Other fintech upstarts have also tried, and failed, to offer more attractive rewards and rates on checking and savings accounts. PerkStreet, which used to offer generous rewards on online accounts and was endorsed by Dave Ramsey, went out of business in 2013. It could no longer afford to pay rewards to its customers. Another company, SmartyPig, has halved its rate on online savings accounts to around 1%.

Du, a graduate of MIT and Harvard Business School who previously worked at J.P. Morgan and KKR, said he founded Beam because it irked him that financial institutions were pocketing profits that should've passed along to consumers. He previously founded and ran a daily deals site in China that experienced explosive growth before folding in 2013.